Tuesday, January 12, 2010

US Rail Freight Under The Spotlight This Month

Declining Revenues Affect All the Major Carriers
Shipping News Feature

US – The decreased demand for coal has been a factor crucial to profits for the country’s rail carriers for the past few months. Those whose business relies heavily on transporting the fuel for the nations power stations will demonstrate over the next few weeks how successful they have been in keeping shareholders happy in the light of reduced revenues across the rail freight sector and the results are likely to be interpreted as favourable compared to many of the larger truck operators and sea freight carriers, despite the trials and tribulations in the sector.

There isn’t much good news however when one considers the situation as a whole, although the rail carriers appear to be making the best of a bad job with less to work with. The next major rail corporation report is due with a conference call by the CSX Corporation who will speak to shareholders at 8.30 am on 20th January to analyse Q4 figures announced the previous evening.

Third quarter figures for the group saw a 15% decline in volume with revenues down 23% to $2.3 billion. Operating ratio was up to a record level and this produced earnings of 74 cents per share, down from 93 cents the previous year, this, on earnings of just $293 million compared to 2008’s $380 million. Analysts are predicting earnings per share will be about the same level this time, around 76 cents, again against an 11% drop in revenue to around $237 million.

What is worrying is the underlying trend downward for year on year figures, but most observers feel that the market has now bottomed out although no one is expecting a rapid recovery to anything like previous levels.

The CSX figures are, as is usual with the large corporations, clouded by previous write downs and adjustments, often making it impossible for all but the most closely involved experts to put a truly balanced analysis together. It would seem that CSX, third largest rail freight transporter by turnover, are likely to have achieved better results than some of their closest rivals.

When Warren Buffett “bet the farm” on the purchase of the Burlington Northern Santa Fe Corporation, one position up in the revenue volume table from CSX, many investors began to look closely at the sector. Now, with results from the company due the same day as opponents Union Pacific on 21st January, observers are bound to draw comparisons. Both are likely to post disappointing results with predictions of reduced revenues, down around 18% for BNSF and 12% for UP, according to reports. The Norfolk Southern Corporation are due to post their figures before the month end and similar drops in revenue and returns are also anticipated.

Buffett however is playing the long game and management changes were announced this week at BNSF, there will be a stockholders meeting on the 11th February to vote on the $44 billion merger and the company is now a wholly owned subsidiary of Buffett’s Berkshire Hathaway investment group. Rather than diminishing its rivals the deal has reinforced confidence in the sector at a time of lower returns for most investors.

Carriage of bulk agricultural products will always be a mainstay for the rail groups and simple logic means people will always need to eat, so grain products are a staple in every sense of the word. Whether home grown or imported there is a steady supply of freight trucks ferrying produce and this supports a large part of the rail freight market. Look, however, for an increased intermodal challenge from the major rail companies in the coming years. By developing profitable multi modal depots, something the US lacks considering its size, plus their own in house local trucking capabilities, the rail carriers can counter the parts of their market which have reduced, and may continue to fall off. BNSF claim to carry coal which supplies 10% of the nation’s electricity. With demands being made to reduce emissions across the board, the continuing shortfall of revenue for the rail groups from their power generating supply divisions must be made up by attacking the long haul truck market with increased vigour. The ongoing trend in the push for more efficiency and cleaner air may well result in more rail company owned logistics facilities in a country with ample space to accommodate them.